2016 (1) TMI 756 - AT - Income Tax

Addition on account of brand building and advertisement expenses - CIT(A) deleted the addition - Held that - The assessee was incurring the expenses under consideration for its sales promotion and those expenses were incurred from year to year in the regular course of business. Therefore, those were revenue in nature and as such the ld. CIT(A) rightly deleted the addition made by the AO. - Decided in favour of assessee Addition made by the AO on account of depreciation - CIT(A) deleted the addition - Held that - In the present case, it is not in dispute that the assessee grouped the POS Terminal Hardware under the head Plant & Machinery. One set of POS Terminal was consisted of a monitor, A CPU, A Printer, a scanner, Card swipe machine and a UPS. The aforesaid items were integral part of computer system which were entitled for a depreciation @ 60%. Therefore, the ld. CIT(A) rightly directed the AO to allow the depreciation @ 60% instead of 25% allowed by him.- Decided in favour of assessee Disallowance of deprecation on sealed premises - CIT(A) deleted the addition - Held that - CIT(A) rightly directed the AO to allow the depreciation on the assets of the assessee which were included in the block of assets. See CIT Vs Oswal Agro Mills Ltd. (2010 (12) TMI 947 - Delhi High Court) and CIT Vs Sonal Gum Industries (2009 (2) TMI 84 - GUJARAT HIGH COURT ) - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition on account of brand building and advertisement expenses.
2. Deletion of addition on account of depreciation claimed by the assessee.
3. Deletion of addition on account of disallowance of depreciation on sealed premises.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Brand Building and Advertisement Expenses:
Facts and Arguments:
- The assessee filed a return declaring a loss, which was processed and later scrutinized. The AO disallowed Rs. 1,64,99,137/- out of Rs. 2,06,23,921/- claimed under advertisement and brand building expenses, treating them as capital in nature.
- The AO amortized these expenses over five years, allowing only 1/5th in the current year, based on case laws such as Hylam Ltd. Vs CIT and Assam Bengal Cement Co. Ltd. Vs CIT.
- The assessee argued that these expenses were for business promotion and did not create any capital assets. They cited cases like CIT Vs Berger Paints India Ltd. to support their claim that such expenses should be treated as revenue expenditure.

Decision:
- The CIT(A) found that these expenses were incurred for increasing profitability and efficient running of the business, thus revenue in nature. The reliance was placed on CIT Vs Berger Paints India Ltd.
- The Tribunal upheld the CIT(A)'s decision, noting that these expenses were recurring and essential for business promotion, and thus should be treated as revenue expenditure.

2. Deletion of Addition on Account of Depreciation Claimed by the Assessee:
Facts and Arguments:
- The AO allowed depreciation at 25% instead of 60% on Plant & Machinery, arguing that the items under this head were not solely computers.
- The assessee contended that the items grouped under Plant & Machinery were integral parts of computer systems, thus eligible for 60% depreciation.

Decision:
- The CIT(A) agreed with the assessee, noting that the POS Terminals, consisting of CPUs, monitors, keyboards, etc., were integral parts of computer systems and thus eligible for 60% depreciation.
- The Tribunal confirmed the CIT(A)'s decision, stating that the items in question were indeed part of a computer system and entitled to higher depreciation.

3. Deletion of Addition on Account of Disallowance of Depreciation on Sealed Premises:
Facts and Arguments:
- The AO disallowed depreciation on assets worth Rs. 3,46,07,406/- that were sealed and not used during the year, citing that depreciation is not allowable on unused assets.
- The assessee argued that the assets were part of the block of assets and depreciation should be allowed under the block system, irrespective of their use during the year.

Decision:
- The CIT(A) deleted the disallowance, referencing the Delhi High Court's decision in CIT Vs Oswal Agro Mills Ltd., which held that depreciation is allowable on the block of assets, and individual asset usage is irrelevant.
- The Tribunal upheld the CIT(A)'s decision, emphasizing that under the block of assets system, depreciation is allowable as long as the block is in use, regardless of the individual asset's usage.

Conclusion:
The Tribunal dismissed the department's appeals, confirming the CIT(A)'s decisions on all issues. The expenses for brand building and advertisement were deemed revenue in nature, the higher depreciation rate for computer systems was upheld, and depreciation on sealed premises was allowed under the block of assets system.